TMI Blog2017 (7) TMI 420X X X X Extracts X X X X X X X X Extracts X X X X ..... is directed to re-compute the interest chargeable under section 234A of the income tax act after granting credit of tax deduction at source claimed by the assessee, if found in order. The Ld. and assessing officer is further directed to not to charge interest under section 234B of the income tax act on the income of the assessee which is subject to withholding tax. - ITA No. 4781/Del/2013, And ITA No. 634/Del/2015 - - - Dated:- 16-1-2017 - SHRI I.C.SUDHIR, JUDICIAL MEMBER, AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER For The Assessee : Sh. G.C. Srivastava, Adv For The Revenue : Sh. Anuj Arora, CIT Int Taxation ORDER PER PRASHANT MAHARISHI, A . M . 1. These are the appeals filed by the assessee against the order of the ld Assessing Officer dated 25.06.2013 and 04.12.2014 for the Assessment Year 2008-09 and 2010-11 respectively. 2. The assessee has raised the following grounds of appeal for the Assessment Year 2008-09:- 1 . The learned AO has erred, in law, by holding that on account of the activities of NetApp India Private Limited ( NetApp India ) , a permanent establishment ( PE ) is constituted for NetApp B . V . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f section 44DA to tax the income from the sale of software, subscriptions and services in India without allowing for any expenditure incurred by the Appellant outside India and by considering 100 % of such receipts as being attributable to the alleged PE in India . 10 . In computing the Appellant's tax liability, the learned AO has erred in not providing credit for taxes deducted at source amounting to INR 3,05,91,767, as claimed by the Appellant for AY 2008 - 09 . 11 . The learned AO has erred in levying interest under section 234A the Act amounting to INR 4,25,05,160, for a period in excess of the actual delay of 18 months in filing the return of income for AY 2008 - 09 and computing such interest without considering credit for tax deducted at source of INR 3,05,91,767 . 12 . The learned AO has erred in law and in fact, in levying interest under section 234B of the Act, amounting to INR 13,38,91,254, disregarding the fact that the entire income of Net App B . V . , which has been held to be taxable, was subject to withholding of taxes in India owing to which advance tax was not liable to be paid . 13 . The learned AO has erre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 . The learned AO has erred, in law, by invoking the provisions of section 44DA to tax the income from the sale of software, subscriptions and services in India without allowing for any expenditure incurred by the Appellant outside India and by considering 100 % of such receipts as being attributable to the alleged PE in India . 9 . In computing the Appellant's tax liability, the learned AO has erred in not providing credit for taxes deducted at source amounting to INR 4,57,54,106, as claimed by the Appellant for AY 2010 - 11 . 10 . The learned AO has erred in levying interest under section 234A the Act amounting to INR 1,96,73,100 by computing such interest without considering credit for tax deducted at source of INR 4,57,54,106 11 . The learned AO has erred in law and in fact, in levying interest under section 234B of the Act, amounting to INK 6,22,98,150,disregarding the fact that the entire income of NetApp B . V . , which has been held to be taxable, was subject to withholding of taxes in India owing to which advance tax was not liable to be paid . 12 . The learned AO has erred in initiating penalty proceedings under sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... support services. The subscriptions for software are sold independently with respect to NetApp products and it charges for product upgrades, enhancements, bug fixing and release of patches. The software contained in NetApp products is specifically designed for hardware of NetApp and is not general-purpose software. The assessee also provides installation, warranty and professional services with respect to data migration, data integration and disaster recovery services. As stated, assessee deals with the distributors in India on principle-to-principle basis, hence, it is claimed that it does not have any income on sale of these products in India. 7. ICo, belonging to Net App Group, provides some services to assessee such as marketing and sales support, assistance in organizing trade shows, ascertaining market trends, competition analysis and assistance in pre sales marketing as promotional material for Net App products and services. For rendering these services ICo has entered into an agreement on 27.04.2002 with M/s. Network Appliances BV (known as NetApp BV)(the assessee) titled as Commission Agent Agreement . According to this agreement, the assessee was to perform followi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch power or authority . d . Independent Contractor . The relationship of NetApp India and NetApp BV established by this agreement shall be construed to ( i ) give either party the power to direct and control the day to day activities of the other ( ii ) constitute the parties as partners, joint ventures, employer and employee, co - owners, or otherwise as participants in a joint undertaking, or ( iii ) allow either party to create or assume any obligation on behalf of the other for any purpose whatsoever . NetApp India shall be solely responsible for, and shall indemnify, and hold NetApp BV free and harmless form, any and all claims, damages or lawsuits ( including attorney s fees incurred by NetApp BV ) arising out of its acts or the acts of NetApp India employees or its agents . 8. For AY 2008-09 Assessee has filed its return of income showing Nil income and claimed refund of tax withheld by the distributors and customers amounting to ₹ 3,05,91,767/-. As the assessee is a company incorporated under the laws of Kingdom of Netherland, having tax residency certificate issued by the Netherland Tax Officer dated 04.11.2010, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manent establishment in India in form of NetApp India within the meaning of Article 5(1), 5(2) and 5(5) of the Double Taxation Avoidance Agreement between India and Netherland. 10. The assessee has received a sum of ₹ 339284582/- towards software subscription which according to the assessee is not chargeable to tax in India as it is not a royalty income, because the payment would be for the use of a copyrighted article and not use of copyright. It was further argument that the software is embedded in the storage equipment and is sold as consolidated product and therefore it is not royalty income. It was the further contention of the assessee that,assuming while denying, the sum is chargeable to tax as royalty, it can be taxed under Article 12 of the DTAA and not article 12(7) and Article 7 of the DTAA. Therefore, in nutshell the contention of the assessee is that software licensing income is not chargeable to tax in India as royalty income and even otherwise if it is taxed as royalty income it is not effectively connected with its alleged PE and hence, not chargeable as business income. 11. Ld. AO rejected contention of the assessee of not having a permanent establishme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntention of the appellant as in the case of Indian associated enterprise, Ld. TPO has proposed an adjustment to the total income of that Indian AE. Further assessee submitted that there cannot be any attribution of income as assessee has incurred operating losses. This argument was also rejected by the Ld. assessing officer stating that the operating losses arise because of the huge commission expenses paid by the assessee for booking global sales. Further according to Ld. assessing officer, assessee is only a trading company and no research and development activities undertaken, the Indian office of the permanent establishment are also acting as the local sales office as per the distributors agreement and therefore Ld. assessing officer attributed 90% of the profit applying the gross profit margin of 26% to the permanent establishment of the assessee in India. Thereby the gross profit of ₹ 160061938/-was estimated and from that a proportionate expenses of ₹ 115834216/-was granted as deduction resulting into net profit of ₹ 48227721/-. Hence, 90% thereof was held to be attributable to the permanent establishment of the assessee amounting to ₹ 43404949/-. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e submitted that Indian entity is merely a service provider to the assessee and it would not be appropriate to conclude that where a person obtain service in relation to business from another person, the service provider is held to carry on the business of the service recipient. He further submitted that both the parties are two separate legal entities. He further submitted that that appellant does not have any personnel to carry on its business in India and the Indian entity is separate from its shareholders. He further submitted that the employees of the Indian entity do not work under the control and supervision of the appellant. In nutshell he submitted that the function test together with not having any fixed place of business shows that appellant does not have a permanent establishment in India in terms of article 5 (1) of the Double Taxation Avoidance Agreement. He relied on the decision of Hon ble Supreme Court in case of Morgan Stanley Co. inc 292 ITR 416 and of Hon ble Delhi High Court in case of DIT vs. E-Funds IT solutions. He further relied on the decision of Hon ble Delhi High Court in case of Adobe Systems Inc ( WPS 2384/2013 CM 4515/2013). He further stressed hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that Indian entity does not bind the assessee company in any manner in relation to its contract for sale. He submitted that all important element of a contract for sale such as price and credit terms are determined and decided by the appellant including the approval of the purchase orders. He submitted that Indian entity is just performing the activity of liaison, communication and support to the customers. With respect to the global sales, it was submitted that direct sales are made under the global agreement or from the distributor and the Indian entity does not have any role to play with respect to such sales. Therefore, Indian entity does not have any role to play with respect to conclusion of the sales of the appellant. He further took us to the agreement entered in to by assessee with the Indian entity demonstrating that Indian entity does not have any authority to conclude contracts on behalf of the assessee. He submitted that Indian entity does not habitually conclude contracts on behalf of the company but it is the distributors in India who will conclude contracts with the end-users, customers in their own name. 19. Regarding the dependency of the Indian entity on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpensation has been paid to the Indian entity, no additional amount can be taxable in the appellant s hand. For this proposition, he relied on the decision of Hon ble Delhi High Court in case of Adobe Systems Incorporated (supra). 23. He further submitted the risk matrix between the appellant, distributors and Net APP India to show that the functions performed by these parties, major risk has been taken by the appellant and distributors and no risk rests on the Indian entity. 24. Ld. departmental representative submitted that agreement of the appellant with the Indian entity titled as commission agent was entered into on 27/04/2002, whereas the appellant filed its first return of income for assessment year 2008 2009 on 31/3/2010 i.e. after 27 months of the due date to claim refund of tax deducted at source. This proved that the assessee was carrying on its business activities in India since then. Therefore according to him the assessee is carrying business activities in earlier years therefore there is withholding tax on the income of the appellant in India, hence assessee is claiming the credit of tax deducted in India against its tax liability in its country of residence of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee with other resellers as well as the commission agents agreement of the appellant with Indian entity. He drew an analogy that Indian Company is making sales of products in India. 25. He further referred that claim of the appellant that Indian entity is an independent contractor is devoid of any merit referring to the various clauses of the agreement where accounting and reporting of expenditure and receipt is mentioned, provision of general administrative assistance to the appellant and maintenance of inventory. He therefore submitted that there is a complete control on the Indian entity of the appellant and he further stated that the Indian entity is remunerated on cost plus basis and no independent party would agree for such a kind of arrangement of remuneration. In nutshell, his argument was that Indian entity is functioning exclusively for the appellant and Indian entities prohibited to perform similar services to any other entity and hence Indian entity is not an agent of independent status in terms of paragraph 5 and 6 of article 5 of the double taxation avoidance agreement but is a dependent Agent . Based on the above arguments he submitted that it is the Indian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that Indian entity has exercised in practice an authority to obtain the purchase orders in the name of appellant. He further submitted that during the course of hearing appellant was asked to prove the negative that it has no permanent establishment in India and he submitted that that the question how the contract for sale including terms and conditions, prices etc are arrived at in respect of Indian customers. He further referred to the decision of the coordinate bench in case of Amadeus global travel distribution SA (2008 TII 03 ITAT DEL INTL) which has been affirmed by Hon ble Delhi high court. In nutshell, he contended that Indian entity is not an agent of independent status and therefore in terms of article 5(5) of the double taxation avoidance agreement, assessee has a permanent establishment in India. 28. He further assailed the argument of the appellant that transactions of appellant with Indian entity are not at arm s length. For this he referred to the transfer pricing study report and functional analysis, which showed that international transactions of the Indian entity in providing marketing support services. He further referred that the Ld. transfer pricin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equately reflect the functions performed and the risk assumed by the enterprise in such a situation there would be a need to attribute profits to the permanent establishment for those functions and risks that have been considered. 29. On the issue of attribution of profit to the permanent establishment he submitted that the Ld. assessing officer has followed the method adopted by the coordinate bench decision which has been approved by Hon ble high court in case of Rolls-Royce plc which is consistent with the principles stated in article 7 (2) of the double taxation avoidance treaty. Regarding the adoption of the global profit rate which was objected by the Ld. authorized representative he submitted that the contention of the Ld. authorized representative is against the methodology described in article 7 (2) of the double taxation avoidance agreement. He further stated that appellant s reliance on the decision of Hon ble Delhi High Court in case of BBC worldwide Ltd is not correct because in that case 15% of all receipts were paid to the Indian company towards commission for services provided as an agent were attributable and further as per the protocol the attribution cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India. He submitted that assessee s business activity test also fulfils, as it is not providing mere back-office support services. He further stated that Indian associated enterprise is not an independent entity but it is a dependent agent because revenue is only derived from group-associate enterprise, the authority to conclude contracts, and legal and economic dependence of the Indian entity also rests on the appellant. On the attribution of profits, he vehemently concluded that profits attribution has been correctly applied by Ld. assessing officer. 33. In rejoinder ld. Authorized representative submitted further detailed arguments on the issues raised by the Ld. departmental representative. On the issue of the basic facts, he submitted that that appellant is engaged in the business of selling storage equipment and products and rendering of certain services in Asia-Pacific region including India. These products are sold through Third party distributors who are appointed on a non-exclusive basis. Sales are made to global customers outside India through Master Service agreements at pre agreed terms. The company also engages itself in direct sales contracts, where though the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to be regarded as its permanent establishment. He submitted that there is no such clause/provision in the Double Taxation Avoidance Agreement of considering certain functions as permanent establishment of the appellant. He further submitted that Ld. departmental representative is trying to make an altogether new case, which is solely based on mere surmises and conjectures without there being any tangible material on record to substantiate any of such allegations. Therefore, he submitted that it is not open to the revenue to make out a totally new case and the only option available with the revenue is to support the findings of the Ld. assessing officer from the facts existing on record even if they are incorporated or not in the assessment order. Despite this, he submitted that all such allegations are unsubstantiated and they are repudiated as under. a. On the issue of the business connection, it was submitted that appellant is governed by the provisions of the India- Netherlands Double Taxation Avoidance Agreement, as they are more favorable to the appellant compared to the Indian tax laws. He further submitted that business connection would not exist in the condition prescr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings of the appellant are held outside India and further the fixed place of permanent establishment are also not satisfied. For this proposition, he referred to the commentary on double taxation avoidance agreement of Prof Klaus Vogel and OECD commentary on article 5 as well as the decision of CIT versus e-funds IT solutions. e. With respect to the contention that appellant has local sales office in India he submitted that that revenue has ignored the fact that distributor undertakes the sales to customers in India and the Indian entity s offices are only providing marketing support functions and not making any sales of the net products. Regarding the allegation of the revenue, that appellant has sales outlets he submitted that that Indian entity is not a store that sells the goods of a particular manufacturer or wholesaler therefore it is not falling within the definition of sales outlet. He further referred that provisions of DTAA has carved out an exclusion from the definition of permanent establishment whether the place of business for the purpose of storage display of goods or the supply of information does not constitute a fixed place permanent establishment. f. With ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces. For this reason, he submitted that Indian entity is not solely reliant on the appellant in relation to its operation and being an independent agent, it does not create an agency permanent establishment in India of the appellant. k. Regarding the transfer pricing adjustment made in the case of the Indian entity he relied upon the decision of Adobe Systems Inc he submitted that even if there is a dispute in relation to the transfer pricing assessment of the Indian entity it is liable to be resolved in proceedings relating to that Indian entity and it does not make any difference in the hands of the appellant. He submitted that even otherwise the transactions between the appellant and Indian entity are at arm s length. He further submitted that there is no dispute on the functional profile of the Indian entity between that particular entity as well as the Ld. Transfer pricing officer in case of Indian entity. He further submitted that despite the fact that revenue has challenged the order of the Ld. First appellate authority in case of the Indian entity before coordinate bench of the tribunal there is no bearing on the determination of the permanent establishment of the appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He further submitted that user of all the assets such as labour, equipment, the data, the literature brochures and promotional materials which are provided free of cost has also been disclosed in the transfer pricing study report. He vehemently relied on the Hon ble Delhi High Court decision in the case of E- Funds IT solutions wherein it has been held that even if software or intangible data was provided free of cost it does not automatically result in the Indian entity constituting a permanent establishment of the foreign taxpayer in India. He submitted that delay in signature of contracts with the reseller cannot be indicative of determination of permanent establishment of the appellant. He further submitted that all the costs, which are related to the transaction with the appellant, are duly accounted for and even otherwise, it does not have any impact in determination of the P permanent establishment. He further submitted that that separate disclosure with respect to hardware and software components embedded in it is only because of the different rate structure of custom duty payable on these products and which does not have any bearing on the determination of the permanent e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92 ITR 416 and of Hon ble Delhi high court in case of DIT versus e-funds IT solutions, and Adobe Systems Inc, National petroleum Construction Company versus DIT. In substance, his argument was that appellant does not have any permanent establishment in India in absence of a fixed place PE or an agency PE and therefore the income is not chargeable to tax in India. 34. We have carefully considered the rival contentions. The facts are undisputed that Assessee is a non-resident company who is resident of Netherlands and h possess tax residency certificate of that country. In this background, it is also undisputed that assessee s income first required to be tested whether it is chargeable to tax according to The Income Tax Act 1961. If the answer is yes then it is further required to be tested wither it is eligible for the benefit of Double taxation Avoidance Agreement between the two countries or not. If the answer to that is also positive then it is required to be seen what is more beneficial to the assessee, applicability of DTAA or The Income tax Act and whatever is more beneficial shall be applied to the assessee. 35. On examining the contention of the assessee with respect t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... established. 36. On this background, it is undisputed that the assessee s income shall be chargeable to tax in India as assessee has business connection in terms of section 9 of the income tax act and therefore the income of the assessee is chargeable to tax in view of the provision of section 4, 5 and 9 of the Income Tax Act. 37. As it is conclusively held that income of assessee is chargeable to tax in India according to the provision of the income Tax Act 1961, now if the provisions of DTAA are more beneficial to the assessee, same shall be applied. According to the provision of the DTAA, it is required to be seen that whether income earned in India by the assessee are falling within the definition of Royalty or fees for technical services or Business Income . Based on these characterizations the Income shall be determined for chargeability under respective articles of DTAA. The Main Income Stream of the assessee is ₹ 631007453/- as hardware Income, Software and Subscription Income of ₹ 339284582/- and service income of ₹ 223963915/-. For taxation of Business Income, the Ld AO has held that in view of the permanent establishment of the assessee in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant is a trading concern such activities cannot be regarded as auxiliary and preparatory services but are core services. The Indian company in terms of the commission agreement also performs the activity of educating the potential as well as existing customers and imparts training to them. In nutshell, the Indian company looks for potential customers in India, holds promotional and marketing activities, acts as sales and/or any other enquiry office for customers in India, communicate such enquiries to the head office and also assist the company in other activities attached to sales in India and, therefore net app India is a permanent establishment of assessee in India. He further held that that the contract does not necessarily mean written or formal contract but it can also be oral or verbal as well as implied. He further stated that actual conclusion/signing of contract is not material and by virtue of common directors, they were eligible to sign contracts for foreign company as well as for Indian agent establishes that agent do have powers to conclude contract. He further held that appellant has the sole responsibility of providing technical/maintenance assistance to its custo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... place of extraction of natural resources ; (g) a warehouse in relation to a person providing storage facilities for others ; (h) a premises used as a sales outlet ; (i) an installation or structure used for the exploration of natural resources provided that the activities continue for more than 183 days. 3 . A building site or construction, installation or assembly project constitutes a permanent establishment only where such site or project continues for a period of more than six months. 4 . Notwithstanding the preceding provisions of this Article, the term permanent establishment shall be deemed not to include : (a) the use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise ; (b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage of display ; (c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise ; (d) the maintenance of fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess through which the business of the enterprise is wholly or partly carried on. Therefore, the requirements are that a. there has to be a fixed place of business and b. Through that, business of the foreign enterprise should be wholly or partly carried on. 41. In the present case the appellant has a group subsidiary in India, which has some offices. It is required to be examined whether the Indian company, being a group subsidiary would itself become a permanent establishment of the appellant or not. It is important to look at clause 5 (7) of the double taxation avoidance agreement between the countries. According to that clause the fact that a company which is a resident of one of the state controls is controlled by a company which is a resident of the other state, or which carries on business in the other state (whether through a permanent establishment or otherwise), shall not of itself constitute another company a permanent establishment of the other. On looking at the above clause it is apparent that holding or a subsidiary company by themselves would not become permanent establishment of each other. The words used in the said paragraph are equally important beca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not make them, i . e . the two companies, a PE of each other . However, this does not mean that a subsidiary can never be a PE of the holding company, though there is opinion that the holding company or the controlling company possibly may not be a PE of a subsidiary ( the later question is not subject - matter of the present decision and we express no opinion on the said question though it may be a relevant aspect, which the tax adjudicators, policy makers and the legal draftsmen in India and abroad may have to deal with ). Indeed if this principle is not applicable it could be argued that the Indian subsidiary, i . e . , e - Fund India's income could be taxed in the country from where it is controlled or managed . A subsidiary can become a PE of the holding / controlling company or the related company, if it satisfies the postulates and requirements of other paragraphs of Article 5, notwithstanding and negating the protection provided under paragraph 6 of Article 5, which recognizes legal independence of the two entities for tax purposes . This legal principle that the holding or contracting company and the subsidiary or the controlled company a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the OECD - based tax treaty doctrine is that a subsidiary PE can only be based on the agency clause . However, the tax treaties aim at allowing the source state to tax business profits with a certain economic allegiance to the country expressed through the enterprise's PE . This intention must also apply when the parent company's business income is earned by the intermediation of a subsidiary . Thus, from a de lege ferenda point of view, PE taxation of the parent company is justified in cases where residence state taxation of the subsidiary does not adequately attribute taxing jurisdiction to the source state . The commentaries to the OECD model treaty do not de lege lata give conclusive reasons for the conventional wisdom with regard to this question . A part of the above observations are in the nature of justification of right of taxation in source State and relate to the domain of PE principle and inter state neutrality as a theory . Issue of source State in the present factual matrix has been touched below . 14 . The aforesaid principle is no longer res integra and has been lucidly elucidated by the Supreme Court in DIT ( Inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis of the concept of Economic Nexus is an important feature of Attributable Profits ( profits attributable to the PE ). ( Emphasis supplied ) 15 . ECONOMIC AND SOCIAL COUNCIL in their report dated 17 . 10 . 2008 have stated; - 38 . 1 In relation to the test of legal dependence, it should be noted that the control which a parent company exercises over its subsidiary in its capacity as shareholder is not relevant in a consideration of the dependence or otherwise of the subsidiary in its capacity as an agent for the parent . This is consistent with the rule in paragraph 7 of Article 5 . But, as paragraph 41 of the Commentary indicates, the subsidiary may be considered a dependent agent of its parent by application of the same tests which are applied to unrelated companies . 16 . It has been observed below, that subsidiary can constitute PE, other than dependent agent PE . A write - up in Bulletin for International Taxation, February 2011 titled The Subsidiary as a Permanent Establishment has summarised the true and correct legal position in the following words; - 'A PE is, however, not always easy to i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt it is apparent that assessee has not deputed any of its personnel in India and also the directors of the Indian company have not functioned for the business of the appellant company. Further, the control over the financial and administrative activities of Indian company by the appellant by virtue of clause 2 (b) of the agreement wherein that the Indian company shall account for expenditure and receipts, and shall also report and provide general administrative services to the appellant are also for the reason of the control over the commission agent itself and cannot be said that such reporting of expenditure and receipts results into the control over the Indian entity by the appellant resulting in to PE. Therefore it cannot be said that appellant controls or is controlled by the Indian company or vice a versa. Therefore, on the basis of the above, it is apparent that a group subsidiary can be permanent establishment of the holding company if it satisfies the requirement of the other paragraphs of article 5 of the double taxation avoidance agreement. In view of this, we reject the contention of the revenue that merely because it is a group subsidiary in India of the net app group ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n reading of the agreement it is apparent that Indian company is a service provider to the appellant and it does not have any authority to conclude any contracts on behalf of the appellant. The Indian company is a separate legal entity undeniably, which has its own Board of Directors premises employees contracts etc and the employees of Indian company work under the control and supervision of Indian company only and not the appellant for provision of its services to the appellant. The Ld. assessing officer has stated that the services provided by the Indian company to the appellant s Central and core activities to hold that Indian entity is a permanent establishment of the appellant. The Ld. assessing officer has also not put forth any evidence which leads to the fact that it is not the business of the Indian company that is being carried out in India, but it is the business of the appellant being carried out in India through the Indian entity such as deployment of the staff by appellant to the Indian company and working in tandem with the employees of the Indian entity for effecting sales in India. Further the Indian company is also remunerated by the appellant on cost plus basis. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee has a PE in India in terms of Article 5 ( 1 ) of the Indo - US DTAA . 33 . In E - Funds IT Solution ( supra ) , this Court had expressly negated that an assignment or a sub - contract of any work to a subsidiary in India could be a factor for determining the applicability of Article 5 ( 1 ) of the Indo - US DTAA . The Court had further expressly held that : Even if the foreign entities have saved and reduced their expenditure by transferring business or back office operations to the Indian subsidiary, it would not by itself create a fixed place or location permanent establishment . The manner and mode of the payment of royalty or associated transactions is not a test which can be applied to determine, whether fixed place permanent establishment exists . Reference to core of auxiliary or preliminary activity is relevant when we apply paragraph 3 of Article 5 or when sub - clause ( a ) to paragraph 4 to Article 5 is under consideration . The fact that the subsidiary company was carrying on core activities as performed by the foreign assessee does not create a fixed place permanent establishment . 34 . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... offices of Indian entity. It is further contended that net app India is not providing mere back-office support services, but it is engaged in the capacity building of the group and appellant. We are of the opinion that common directors of the appellant and net app India. They are not engaged in the day-to-day activities of the appellant renegotiation of any contracts or performing any marketing functions in India on behalf of the appellant. Merely because there are common directors is not determinative factor whether the net app India as an authority to conclude contracts on behalf of appellant. The reliance is aptly placed on the decision of the coordinate bench in ITO versus Pubmatic India (P.) Ltd. (158 TTJ 398) (MUM) wherein it has been held that merely because one of the directors is common in both the companies does not constitute the assessee as PE. Even otherwise the common director and holding of the company by itself does not constitute either company as a Permanent Establishment of the other as per Para 6 of Article 5 of Indo-US DTAA. We also do not see any such provision in the double taxation avoidance agreement applicable in this case. Therefore, we reject that conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing used by the appellant and therefore there are sales outlets in India which falls under the article 5 (2) (h) has permanent establishment. The term sales outlet is not defined in any legislation. However, the general meaning of the term is a place of business for retailing of the goods and Tom outlet in particular is generally defined as a store that sells the goods of a particular manufacturer or wholesaler. Therefore Sales outlets are generally understood as a place of business for retailing of the goods, from where the goods are sold and delivered to the customers. No doubt the Indian entity has several local offices in India but these offices as stated by the Ld. authorized representative are with regard to the marketing support function that net app India is required to provide under the terms of the commission agent agreement with the appellant. According to him the distributors undertakes the sales to the customers, in the local offices of the Indian entity are only providing marketing support function and not making sales of the net app products. In the website of the group also these are the contact us places therefore they are only contact points for the customers for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ystem Incorporation (Supra) has also held that a permanent establishment cannot be constituted in India only on account of the fact that appellant has a right to ask for the expenditure and income in terms of the agreement between the parties. There may be reasons for doing so because of the commercial aspect for the provision of specifications, assistance, and supervision etc however it cannot lead to an inference that the appellant by exercising the above rights creates its permanent establishment in India. For an agent to be of an independent status, (1) the agent must be legally independent of the principal, (2) the agent must be economically independent of the principal; and (3) the agent must represent the principal in the ordinary course of business. Legal Independence of the agent must be tested on the line of agent s obligation. In the present case, the appellant has not brought it on record that the activities of the agents are subject to detailed instructions or comprehensive control. The only reason is that the company is managed by common directors. Further mere persuasive control is not enough. This sole fact in absence of other vital facts, which may depend on the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ys and net app India has incurred expenses on freight, shipping and transportation of the goods and therefore it is engaged in delivery of goods and performing functions of sale on behalf of appellant. It is further alleged that storage systems sold by the appellant on being replacement warranty the parts are replaced in merely 4 hours. Therefore, the inventory is maintained by appellant in India and Indian entity is performing functions of maintaining stock of such goods for sale. It was further alleged by revenue that Indian entity has the right to use the trademarks etc of the appellant and therefore is paying royalty and hence it makes sales in India. We have carefully analyzed all the contentions of the Ld. departmental representative made before us, however, we do not agree with any of them as no evidence has been laid before us which even remotely suggest that Indian entity discusses all terms with the distributors, negotiates discounts to the resellers and decision on sale is taken by the Indian entity in India. With respect to the purchase orders the Indian entity do not solicit or accept purchase orders on behalf of the appellant but the purchase orders raised on the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermanent establishment of the appellant. We do not find any such provision in the double taxation avoidance agreement except where the premises are used as sales outlet. In any case, no evidences or instances have been led that the Indian entity is maintaining any stock of goods of the appellant for delivery on behalf of the appellant. With respect to the allegation that Indian entity has a call Centre, It was submitted that the net app group operated call centers in four locations across the world including India and the post sales support services are provided through its call centre to the customers throughout the world. Income from such call Centre operations are part of ITES segment and are considered in the transfer pricing documentation of the Indian entity. It was further contended that with respect to the services provided by the employees of Indian entity that such services are also provided by other third-party service providers in India, which are also listed on the website of the net app group. It was further stated that net app India provide such services to the appellant s customers in India as part of its own business functions in the course of carrying on its own b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of contracts in the name of the foreign enterprise, it is possible to avoid the application of that rule by changing the terms of contracts without material changes in the functions performed in a State. Commissionaire arrangements as it is in the present case have been major pre-occupations of tax. In most of the cases that went to court, the tax administration's arguments were rejected. The only answer to that would be factually establishing the role of the Icos regarding their actual authority of concluding the contracts. Therefore while deciding the appeals before us; we were led by the facts for the year under appeals only. 46. In view of our above findings, we hold that the assessee does not have a permanent establishment in India under the provisions of double taxation avoidance agreement between India and Netherland. In view of this ground No. 1 of the appeal of the assessee is allowed. 47. Consequently, Ground No. 2, ground No. 6, 7, 8 and 9 of the appeal of the assessee are not required to be adjudicated further, hence they are dismissed. 48. Ground No. 3 and 4 of the appeal of the assessee are against the order of the Ld. assessing officer in holding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Clause 2(f) of the Infrasoft license agreement is quoted as below: (f) The Software shall be used only for Licensee s own business as defined within the InfrasoftLicence Schedule and shall not, without prior written consent from Infrasoft: (i) be loaned, rented, sold, sublicensed or transferred to any third party (ii) used by any parent, subsidiary or affiliated entity of Licensee (iii) Used for the operation of a service bureau or for data processing. Clause 1 of Software License: Supplier grants to Buyer a non-exclusive license to use the accompanying software in machine-readable form ( Software ), together with the accompanying documentation. Clause 2 of End User Software License: NetApp shall retain title to the Software and the accompanying documentation and all copies and any derivative works thereof. Customer shall not make any copies of the Software except as reasonably required for backup purposes. Clause 2 of Software License: Buyer must not make any copies of the Software except as reasonably necessary for backups. Neither Buyer nor any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal of the assessee is allowed with above direction. 50. The ground No. 5 of the appeal of the assessee is with respect to the treatment given by the Ld. assessing officer to the service income as royalty income and fees for technical services under article 12 (4) of the treaty and consequently liable to be tax in India. The Ld. assessing officer has dealt with this issue in para No. 7 of assessment order. During the year the assessee has received a payment. In view of services rendered to its Indian customers amounting to ₹ 2 2396 3915/ . The above payment has been received for the installation services warranty services and professional services rendered by the assessee to its customer with third-party service providers in India. The customers of deducted tax at source on these payments under the fees for technical services. According to the assessee the above income is not chargeable to tax in India, as Indian customers or distributors does not envisage the use of any right, property or information for which are royalty under article 12 (4) of the tax treaty. Further, it is stated that the these services would not also be regarded as fees for technical services as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices arrangement with third-party service providers in India and has similar technical support arrangement with Indian company through the sales support agreement. The Ld. assessing officer has held that the services are predominately-technical services in the nature and has concluded that it is ancillary to the royalty and hence royalty as defined in the act as well as the double taxation avoidance agreement and therefore it is chargeable to tax in India. The Ld. assessing officer has further held that as the assessee is rendering service through qualified personnel of net app India or third-party service providers it is being made available to the Indian customers. We also carefully considered the decision of the Hon ble Delhi High Court in case of DIT versus Guy Carpenter 346 ITR 504 (Delhi), wherein the Hon ble Delhi High Court has dealt with the concept of make available as mentioned in the double taxation avoidance agreement. As the services rendered by the assessee are installation services, warranty services and professional services. It cannot be said that they are made available to the customers using Net app BV products. In fact, the warranty service is taken by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is also allowed. 56. Ground No. 13 of the appeal of the assessee is against initiating penalty proceedings under section 271 (1) of the act, since the appellant is not liable to tax in India. This ground is premature and therefore same is dismissed 57. In the result appeal of the assessee is partly allowed with above direction. 58. Coming to the appeal of the assessee for assessment year 2010- 2011 that is on the similar facts as agreed by the parties. In view of our decision for the assessment year 2008 -2009, we similarly hold for assessment year 2010 2011 as under:- a) as assessee does not have a permanent establishment in India. Therefore, the income of the assessee is not chargeable to tax with respect to sale of the hardware products in India. b) Income arising to the assessee from sale of software and sale of subscription is set aside to the file of the Ld. assessing officer to decide the issue in view of the decision of the Hon ble Delhi High Court in case of CIT versus infra soft Ltd (supra). c) Income from the provision of the services such as installation, warranty services and professional fees are not fees for technical services in terms ..... 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